Small Business With Debt Problems?

If your small business is promising but has certain types of debt problems such as a current and short term cash flow problem; overwhelming trade debt after a prolonged dry spell but business had improved; problematic debt from a one time lawsiut; or continuing collection efforts of the Internal Revenue Service or other taxing authority placing your small business in jeopardy? Perhaps, a reorganization of your business debt under either Chapter 13 or Chapter 11 of the bankruptcy code could allow you to get past this short term problem and stay in business.

If you are a sole proprietor, a Chapter 13 bankruptcy automatic stay usually prevents further collection activities of your creditors, and then allows you to rearrange your payments on your secured and priority debt while either discharging your unsecured debts or permitting you time, up to five years, to pay the unsecured debts that must be paid under the bankruptcy code. Secured debts are usually debts like car payments, mortgage payments, or equipment payments. Priority debts are usually debts owed to governmental units such as the Internal Revenue Service but can also include your personal alimony and child support obligations. This latter category of priority debt may not be able to be rearranged in the same fashion as priority debt to the Internal Revenue Service. Unsecured debt in a small business is usually trade debt for the purchase of goods or services, lines of credit, or possibly a judgment from a lawsuit. However, in a Chapter 13 unsecured debt also includes your personal credit card debt and medical debt whether or not related to the business.

If your business is incorporated, then it could file under Chapter 11 for a similar level of protection from the collection efforts of its creditors and rearrangement of its debts. A significant difference between Chapter 11 and Chapter 13 is that the business can present a Plan of Reorganization to the affected creditors who then cote on whether or not to accept the Plan. If accepted by the majority of the affected creditors, then the Plan becomes effective pursuant to its terms which are often the result of negotiation. Most creditors would rather receive a negotiated payment from a business in bankruptcy than see the business close its doors, leaving little or nothing for the Creditors.